TORONTO, Ont. -- Glen Hodgson, senior vice-president, and chief economist at The Conference Board of Canada, was the keynote speaker at the Conference Board’s Supply Chain Management Forum, held March 2 in Toronto.
Hodgson spoke about the state of the US and Canadian economies going forward into 2010 and beyond.
Technically, he said, while economic growth has returned in the US, reaching 5.7 % in the last quarter, Hodgson said there has yet been no strong recovery in private investment and consumer consumption.
The US will pay a high price for the heavy government investment that has taken place to boost the economy, he said.
“At the peak of the housing bust in the US, one third of mortgages were subprime, ‘NINJA’ mortgages, i.e. no-income, no-job mortgages. The one piece of the US financial workout that’s not yet been settled is the housing market. There’s no true stability,” said Hodgson.
While there is still a significant overstock of housing inventory in the US, the supply is down to six months, and housing starts are predicted to rise but not at a great rate, he said.
The labour market in the US lost 8.4 million jobs in the last year, leading to huge erosion in consumer confidence.
“US consumers make up 70% of US GDP, and 15 % of the worlds, so a drop in consumer confidence is significant. China will eventually take this over as Chinese consumers move from saving 42 % of their income and gain access to credit. Americans are actually saving again-about 5 % of their actual paycheck,” said Hodgson, who predicted a ‘temperate recovery and consumption’ for the US, which is now borrowing about 1.5 billion dollars annually, a hole that represents about 10 % of GDP.
“They will have to have a serious debate about taxation,” he said.
The US will grow at about 2.8 % this year but the balance of ‘too much government’ is wrong, and represents what Hodgson called a ‘ U-shaped recovery’. He said the US won’t experience sustainable growth before 2012.
In Canada, meanwhile, the country was also in a hole. In January 2009 the threat of a shift in government “saw the Tories behave like Liberals, spending their way to growth,” said Hodgson.
He said there will be 2.8 % growth for 2010 in Canada, and 3.3 % next year but “better balanced.”
The Canadian currency is now a “petro-loonie”, i.e. closely tied to oil prices.
“Assumptions about oil are that it will rise steadily. We’re forecasting the dollar will rise to around 98 cents at the end of 2010,” said Hodgson, who noted that the Canadian dollar will remain anchored at a new 95-cent level with upward pressure.
“It will be a challenge for organizations to do business with a strong currency. We’re at a time where global currencies are under attack. Don’t plan on an 80-cent dollar, plan on 95 and have a plan for the dollar at par as well,” said Hodgson.
With regard to banking activity on interest rates, with 5 % annualized growth announced in Q4, the Conference Board of Canada forecasts that the banks will raise rates in Q3 and will raise them very quickly.
“Our view is that banks will raise rates in tandem with rates in US, not to put pressure on the Canadian dollar, but rates will rise,” said Hodgson.
Growth in the Canadian economy should be a signal to companies to invest in machinery and equipment,
“but I see a lot of firms trying to cash-flow manage. Investment was down 17 % in 2009, against our 15% forecast. We have not seen a rise in equipment investment. Governments are the ones trying to spend money now, with capital investments, and governments will be the dominant investors up to 2017,” said Hodgson, who added that this kind of growth comes at a price.
“Collectively we’re in deficit. Canada was paying down debt but government lost revenue in corporate and personal revenue. We’re now deeply in deficit. The question is how quickly we’ll return to balance. We’ll see what (Federal Finance Minister) Flaherty does,” said Hodgson.
While stimulus spending should stay in place for this year to make sure the economy works, he said, “We should be talking about when we can balance the budget again. With tax increases off the table that puts a lot of pressure on the budget. The government is starting to muse about an ‘innovation agenda’ because Canada lacks in productivity growth. I wouldn’t be surprised to see words like innovation, productivity used in the Speech from the Throne,” said Hodgson.
To get more innovation, he advocated that governments should put more pressure on carbon taxation and use.
“We see a recovery in private investment and consumption going forward,” he said.
In five to fifteen years, the rise of India and China, an aging demographic within the industrial world, and integrative trade and global value chains will be additional factors to deal with.
Supply chain management becomes ‘critical to success’, said Hodgson, who noted that firms having an international strategy “built around integrative trade will be in better shape.”
“The whole fundamental model for doing business today has changed. Canadian structural challenges include fiscal deficits and debt, an upward shift in the loonie, NAFTA ‘drifting’ with North American trade stalling as the US focuses on security, the dominance of global value chains, and energy and climate change policy.”
Hodgson stressed that the US EPA (Environmental Protection Agency) has the power to legally regulate greenhouse gases without Congress.
“It has the power right now to put hard caps on the industry,” he said.
“The global economy is much more integrated with new players emerging and growing. Domestic sales, international trade and investment are part of an integrated business, and the management of value chains has never been more important,” said Hodgson.